Warren Buffett, at the age of 90 still the world’s most renowned investor and one of the wealthiest people on earth, had famously lamented in an opinion piece for the New York Times (2012) that his secretary was paying higher taxes than he himself. “My tax rate is lower than anyone else’s in my office,” he complained to legislators, “less than half of my secretary’s, actually”. Wealth disparities, in other words, do not only widen because of the accumulative effects of growth – a three per cent increase in minimum salaries does not move the needle quite as vigorously as the same percentage rise gifting 33 million to a billionaire, but also because capital gains and dividends are taxed for various reasons more leniently than wages.
When asset growth starts to exceed economic growth, the wealthy exact rents from us all, argues French economist Thomas Piketty in his Capital in the 21st Century.
Wealth and income disparities have been painfully augmented by the COVID crisis. Job and pay losses have hit the less well-off much harder. The young, people of colour, the self-employed, jobbers in hospitality and retail, and women already confined to minimum wages, were much more affected by the economic shutdowns than high income earners or asset owners, whose wealth was actually boosted by the upheavals. The world never accommodated more billionaires than in 2020.
Growing inequality, I have argued in my last piece in the Times of Malta, is not only a question of injustice, it is a threat to democracy, social peace and to capitalism itself. Like most people, without much thought and quite negligently, I subscribed to the idea of equality as a moral good. What I should have pointed out more clearly is the fact that the many do not suffer from ‘inequality’ but from simply not having enough. Having enough is not the same as having escaped starvation. It encompasses free access to healthcare, education and professional and material advancement.
“Equality in itself has no moral value,” argues Harry Frankfurt, a moral philosopher whose writings have been pointed out to me by a reader only recently. Demands for equal wealth, equal opportunity, equal recognition or even equal rights harbour promises which are not only unachievable but, in fact, are highly undesirable. We do not wish for a society where everyone is a cardinal, a policeman or Queen Elizabeth II.
What we actually want when we sloppily demand more equality is a society where citizens are bound by the same rules, can fulfil their personal potential and enjoy due respect without the need of comparing themselves to others. What we really want is not a society of ‘equals’, but a community which is humanely inclusive. This means above all a sense of security, gone amiss for years and shattered by the pandemic.
As long as our policies miss the path to more inclusiveness, consumers, goaded by the yellow press, will emulate what they wrongly perceive to be the lifestyle of the rich: stocking up on status symbols they can ill afford in the tantalising hope of social recognition. That Warren Buffett drives a battered, 20 year old Toyota and lives on lifetime diet of Coke, chips and hamburgers, is dismissed as an eccentricity.
We do not wish for a society where everyone is a cardinal, a policeman or Queen Elizabeth II
As investors, admittedly on a retail scale, we are already privileged as we have the means to save, a luxury denied to a majority living from one overdraft to the next. While we will never get filthy rich, which most of us don’t even aspire to, we could still profit from the wealth cravings of the disenfranchised and the disappointed by piggybacking on their choices and sorting our investment strategies accordingly.
Luxury goods companies like LVMH or Kering are best suited to profit from such status craving. Sales of expensive dresses, handbags and watches had initially suffered from the first wave of lockdowns. As foreign travel came to a standstill and duty free shops had to pull down their shutters, conspicuous consumption was deep-frozen. Chinese and Russian travellers, usually never failing to flash their platinum credit cards, were forced to stay at home. Footfall at high street boutiques reduced to a trickle already well before they were closed down by police order, a state of affairs with continues on and off to this day. Yet with savings accumulating and pent-up consumption craving to let go, we could see the business of luxury in China and elsewhere roaring back whenever shops reopened. Where they didn’t open, even most expensive items like watches or cars were unhesitatingly purchased online.
The two behemoths in the world of consumer luxury are LVMH and Kering, owned by rival French billionaires Bernard Arnault and Francois-Henri Pinault respectively.
LVMH, owing brands such as Luis Vuitton, Dior and, recently, Tiffany, has a market capitalisation of €254 billion and an annual turnover of €53 billion. It is an astoundingly successful business, with a profit margin of 13.36 per cent (2020) and a highly positive cash flow. Reflecting on the observations above, it is not surprising that LVMH shares, priced at €510.90 at the time of writing, have gained more than 23 per cent over the year. Shares are priced to perfection, though: exceeding annual sales more than five times and sporting a ‘PEGY’ of 8.86, meaning that its earnings per share relative to growth and dividend predictions exceed any measures of value by far. For the shares not to drop, it needs a lot of Chinese to keep on buying.
Kering, the owner of brands like Saint Laurent, Balenciaga and Gucci is, with a market cap of €72 billion , much smaller in comparison. That its shares have lost out over the year despite a historically healthy profit margin (14.5 per cent), reflects its high debt, modest cash flow and too many high-street outlets suffering from lockdown.
Richemont of Switzerland, proprietor of watchmakers like Vacheron Constantin, IWC Schaffhausen, or Jaeger LeCoultre, of pen maker Montblanc as well as the fashion labels Chloé and Alaia, is only half as profitable as its French competitors. It has a higher finance costs and therefore a negative cash flow. Its market capitalisation of CHF 45 billion has hardly appreciated over the year, gaining a meagre 6.72 per cent.
Hermes, known for its silk scarves and the most expensive hand bags on earth – its vintage ‘Birkin bag’ is traded for 20 thousand dollars on the internet – is the most lucrative of all the purveyors of luxury, with a profit margin of 22.20 per cent. The company is almost debt free, with an enviably massive cash flow. Not surprisingly, its shares are even more expensive than those of its peers, worth more than 15 times sales, or 82 times profits. They have gained 30 per cent in 2020, which is only matched by car maker Ferrari (+36.56 per cent). Luxury shares, it seems, are just that: a luxury ill to afford.
The purpose of this column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com
Andreas Weitzer, independent journalist based in Malta